ITAT directs deletion of disallowed warranty expenses, emphasizing compliance with accounting standards.

The ITAT allowed the appeal, directing the AO to delete the disallowed provision for warranty expenses of Rs. 95,33,312. The decision emphasized compliance with accounting standards and past precedents, noting that the provision for warranty was justified based on scientific evaluation and commercial prudence. The ITAT found no material to establish a mismatch between actual expenditure and the provision made, referencing a previous case where a similar provision was allowed for a different assessment year.

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Issues involved: Appeal against disallowance of provision for warranty expenses by CIT(A) for the assessment year 2005-06.

Facts: The assessee, a subsidiary of a foreign company, filed its return for A.Y. 2005-06, which was selected for scrutiny. The Assessing Officer disallowed provision for warranty expenses of Rs. 95,33,312, leading to an appeal before CIT(A), who upheld the disallowance.

Observations: The AO disallowed the provision stating that any provision is not an allowable expenditure under the Income-Tax Act. The CIT(A) upheld the disallowance based on a mismatch between actual expenditure and provision made for warranty.

Assessee's submissions: The assessee argued that warranty expenses are incurred for repair/replacement of hardware and are covered in product pricing. The provision was made based on scientific evaluation and commercial prudence, supported by case laws and past experience data.

Decision: The ITAT allowed the appeal, noting that the provision for warranty was justified. The ITAT referred to a previous case for A.Y. 2003-04 where a similar provision was allowed. The ITAT found no material to establish a mismatch and directed the AO to delete the addition of Rs. 95,33,313 for provision of warranty expenses.

Conclusion: The appeal was allowed in favor of the assessee, emphasizing compliance with accounting standards and past precedents. The ITAT directed the AO to delete the disallowed amount for provision of warranty expenses.

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